Hot Stock: Philip Morris

Bad for your health, good for returns

(Photo: Justin Sullivan/Getty)

(Photo: Justin Sullivan/Getty)

Cigarettes may be bad for your health, but they’ve proven great for people’s investment returns. Since the recession, a number of tobacco businesses have produced impressive results and many analysts think that will continue.

That may seem surprising, but while smoking is less popular in North America, there are still a lot of people around the world who crave that drag. It’s also a strong performer under all economic conditions; naturally, people aren’t too keen on giving up their smokes, even if money’s tighter.

One company that many analysts like is Philip Morris International (NYSE: PM), the company behind Malboro and L&M. Currently, 66% of analysts who cover the stock say it’s a buy, while 29% have hold ratings.

While the stock price is up 150% since March 6, 2009, when the S&P 500 bottomed, Nathan Gabriel, an analyst with Argus Research, thinks the gains will continue. Growth is coming from Asia, Eastern Europe, the Middle East and Africa, where people are buying all sorts well-known products, including brand name smokes.

It’s also developing safer cigarettes, which Gabriel says is “promising.”

Jack Russo, an analyst with Edward Jones, has a buy rating on the company in part because it’s best positioned to benefit from emerging market growth. It commands about 15% of the worldwide market share for cigarettes, but only 6% of revenues come from developing nations. Because it’s such a large business, Russo thinks it can nab a bigger stake through internal growth and acquisitions.

Earnings growth estimates vary—Russo thinks it can grow earnings by 10% next year, while Gabriel predicts about 6% growth—but most analysts think EPS will rise in 2014.

There are two other things going for this business: dividends and valuations. It’s currently paying a 4% dividend and has increased its payout by 10% over the last year. Russo predicts more dividend raises and share buybacks in the Philip Morris’s future.

The company, which is trading at about 14 times next year’s earnings, is undervalued compared to its peers. “While the shares have risen substantially since early 2009, they are still trading at a discount to peers, which we view as unwarranted given the company’s above-average earnings growth,” says Gabriel.

Its stock price is sitting at $84 a share, but Gabriel thinks it can hit $98 within 12 months. Other analysts have $100 price targets, with one analyst from JPMorgan saying it can even reach $108 next year.